The Federal Reserve kept interest rates near zero and restated its intention to cease buying mortgage-backed securities in March, while losing unanimity on how long to keep borrowing costs low.
At the same time, “the Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets,” the Federal Open Market Committee said in a statement today in Washington.
Policy makers are keeping interest rates “exceptionally low” for an “extended period” as they wind down the record amounts of credit they have provided since the bankruptcy of Lehman Brothers Holdings Inc. in 2008. Kansas City Fed President Thomas Hoenig dissented, saying “financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.”
Sales of new homes fell by 7.6 percent in December – a somewhat unexpected result in a year that proved to be the worst on record. December’s sales fell to a seasonally adjusted annual rate of 342,000 from an upwardly revised November pace of 370,000.
While some are predicting a recovery this year in the housing sector, others feel that the “shadow inventory” – that is, the large number of repossessed properties held by the banks and expected to find their way to the market this year – will quickly overwhelm demand, leading to a pullback in house prices.
This morning, the broader currency markets are trading in a slight range, with the Japanese yen (JPY) and the British pound (GBP) showing gains against the US dollar.There is a mild risk-aversion theme this morning as all eyes are on the US FOMC policy meeting today at 2:15 EST.
As far as news-worthy currency events go, this may be the one which has the largest impact on the market.It is almost 100% certain that the Fed will not be raising rates from .25%, however the market will be looking for clues for any change in language that may suggest a shift in policy.
The markets here in the US have been on edge recently, as political pressure and rhetoric have picked up because of what many see as a rejection of the current administration’s policies.This has caused some in Congress to pull their support for Fed Chairman Bernanke, whose term is up at the end of January.
Let’s take a look at how specific currencies are faring so far:
Aussie (AUD):Earlier today the Australian Consumer Price Index (CPI) number came in at .5% for Q4 and at 2.1% YoY, which was slightly higher than expectations.This sent the Aussie initially higher and above .90 against the US dollar, though it’s now trading below on the move to risk aversion and fears that the moratorium in Chinese lending may affect the Australian economy.
Kiwi (NZD):The Kiwi is trading down on the risk aversion theme, most notably against the Japanese yen around .5% on the morning.The Reserve Bank of New Zealand is coming out with its rate decision later today and is expected to maintain rates at 2.5%, which is a record low.This could weigh heavily on the Kiwi as the market has priced in a 50 basis point rise by mid-year.
Loonie (CAD): The Loonie is trading near a 5-week low as world markets and commodities have sold off recently and the flight to safety trade has been in effect.One of the major factors affecting the Loonie is the price of oil, which is off some $10 from recent highs.
Euro (EUR): The Euro is off slightly this morning, as it attempts to shake off the problems it’s been having related to the debt crisis in Greece.European stock indices are down today, as comments from ECB council member Weber said that the bank may take additional steps to withdraw liquidity from its banking system.With today’s FOMC decision on tap, the Euro could test 1.40 which has been an area of psychological support for some time.
Pound (GBP): Reports are out this morning that the quantitative easing measures that the Bank of England has taken may be working.Although UK GDP came in lighter than expected, it did come in positive which is a step in the right direction.BOE policy-maker Sentance warned that the bank may need to act quickly if the recovery strengthens and inflation picks up.The pound is up to 1.62 vs. the US dollar.
US Dollar (USD):The dollar is weak against the pound and the yen this morning, but otherwise is up slightly against the commodity currencies and the Euro.The market is waiting on the FOMC decision and more importantly if there is a change is language which may give hints about a change in policy.Keep an ear out for a continuation of the “extended period” language.The dollar has been gaining recently, as risk-aversion has heightened around the globe.
Yen (JPY):The Japanese yen is at a 5-week high vs. the dollar, as the Japanese yen benefits the most from the risk-aversion trade.With interest rates at .1% and not moving any time soon, the carry trade is back on with the yen as the funding currency of choice.Also to note is that Japanese exports have risen for the first time since mid-2008, a sign that economic recovery may be taking place.
In world markets, stocks are down in Asia and Europe and the MSCI world stock index is experiencing its largest losing streak in almost a year as concerns that developed economies may be preparing to scale back which affects emerging markets.In the US, the stock markets are down slightly as are gold and oil, which are trading below 1100 and 75 respectively.
Look for a reversal today if the Fed does as expected and maintains uniformity of language with its previous rate decisions.The world markets are looking for some vote of confidence that will allow risk-taking to resume again.Despite all of the political wrangling coming out of Washington, if Bernanke can project confidence that the recovery in the US in taking place, then it may signal game on again!
To learn more about how these events affect the currency markets, be sure to check out our currency trading courses!
To follow these events in a free, real-time practice account, click here!
Tags: account, AUD, Aussie, Australia, bank, Bernanke, British, cad, carry trade, commodities, commodity, course, currenc, currencies, currency, currency market, currency trading, data, decision, dollar, dow, economic, economy, EUR, Euro, Europe, fed, free, fx, fxedu, gbp, gold, Il, index, interest, interest rate, interest rates, Japan, jpy, Kiwi, market, Mike Conlon, new zealand, news, nzd, oil, pair, pound, practice, practice account, rate decision, ssi, stock, stocks, Swiss, time, trade, USD, Yen
Britain’s top financial regulator, Lord Adair Turner, said today there was a need for direct controls on the supply of credit to prevent the build-up of dangerous asset price bubbles.
Turner said policymakers needed more than interest rates to tame asset price booms and urged the setting of a new macro-prudential body in the UK able to take pre-emptive action.
Speaking in Davos, the chairman of the Financial Services Authority called for a committee that would combine the insights of central bankers and regulators, with input from outside maverick economists to avoid the risk of “group think”.
The Financial Times and the Wall Street Journal reported that Greece was turning to China to buy up to 25 billion euros of its bonds to help it through its fiscal crisis, with U.S. investment bank Goldman Sachs promoting the deal to Beijing.
President Barack Obama will address Congress tonight in the annual State of the Union speech that insiders say will focus on job creation. The speech will also likely introduce a multi-year freeze on domestic spending and other initiatives to address the growing deficit.
The euro fell to a six-month low versus the dollar as traders moved to the perceived safety of the dollar on Wednesday. By 0850 GMT, the euro had fallen to 1.4022 dollars, but rose to 1.4068 dollars by mid-morning.
Experts at the World Economic Forum meeting this week in Davos, Switzerland feel that the global recovery is underway but the pace of recovery will be slower than originally expected. It is also expected that emerging markets will outpace the western economies which will suffer a “jobless” recovery – that is, a slow rate of growth that delivers few new jobs to the economy.
Greece on Wednesday denied press reports it had mandated Goldman Sachs to sell bonds to China, but its debt chief reiterated a roadshow in Asia was in the pipeline.
The Financial Times and the Wall Street Journal reported that Greece was turning to China to buy up to 25 billion euros of its bonds to help it through its fiscal crisis, with U.S. investment bank Goldman Sachs promoting the deal to Beijing.
“The Finance Ministry categorically denies that there is any deal to sell Greek bonds to China,” the statement said. “The Finance Ministry has not mandated Goldman Sachs to negotiate any deal with China.”
“The figures reported are not true,” the finance ministry said in a statement to Reuters.
Geithner, in prepared testimony for a much-anticipated congressional hearing on Wednesday, said protracted demands for concessions from banks in late 2008 could have triggered devastating credit rating downgrades and brought AIG down, with “catastrophic” consequences for the U.S. economy.
Geithner’s testimony is widely seen as important for his future as Treasury chief. He has denied acting in the interests of specific institutions.
US Secretary of Treasury Tim Geithner
“I had no role in making decisions regarding what to disclose about the specific financial terms of Maiden Lane II and Maiden Lane III and payments to AIG counterparties,” Geithner said, referring to Fed investment vehicles that bought securities from the banks. The remarks were made available late on Tuesday.
Geithner, who ran the New York Fed at the time of the bailout, faces a grilling by the House of Representatives Oversight and Government Reform Committee, which is reexamining AIG’s payment of $62.1 billion to bank counterparties to close out trades made before and after the insurer was rescued.
Republican lawmakers on the panel have accused the New York Fed under Geithner of wasting billions of taxpayer dollars by failing to negotiate concessions from the banks and then trying to suppress public disclosures about the payments.
